17 Nov Dread disease life insurance – be cautious
We have noticed the increased occurrence of dread disease (also known as critical illness) life insurance and income protection claims during our nearly two decades in the financial planning industry.
This term usually refers to the ‘lifestyle’ diseases such as cancer, heart attack, stroke, multiple sclerosis and so on.
Medical science has progressed wonderfully over the last fifty years and conditions that once were considered incurable are now often treated successfully.
These days the question is not so much “Will I survive this incident?”
Instead it is “Will my finances and wealth be decimated by the occurrence of one of these events?”
So the important discussion that you should have with your financial planner is “What would my financial situation be like if I were diagnosed with a dread disease?” Within our financial planning practice we have seen the growth of claims and experienced first-hand the effect that these events have had on our clients.
The exact scope and comprehensiveness of the cover offered has become confusing as insurers like to differentiate themselves from each other with the cover they offer. Here are some pointers to guide you through the labyrinth of offerings currently available.
There are various terms used by different insurers.
‘Dread Disease Cover’, ‘Critical Illness Benefit’, ‘Severe Illness Benefit’, ‘Permanent Health Insurance’, ‘Living Health Insurance’, and others. These normally refer to the grouping of illnesses or conditions of which the three most common occurrences are: cancer, stroke and heart attack. The insurer would pay cash benefits on the diagnosis of a specified dread disease.
All the insurers offer cover for the so-called ‘Big Three’: cancer, stroke and heart attack. However, many differentiate their offerings by including up to 30 illnesses or conditions. One insurer will even go so far as including conditions that do not exist, but may exist in the future. It is critical that you are made aware of the particular scope of your cover.
Until recently, the level of cover granted was paid out as one lump sum, on the occurrence of one of the listed events or conditions. This has changed somewhat and many insurers are now offering only percentage-based payouts depending on the severity of the event and allowing for multiple claims if the disease or condition worsens. The advent of these severity-based cover payouts has allowed for the inclusion of many minor conditions that previously would not have been covered. In addition to broadening the scope of cover, insurers offer different percentage payouts for the same event, depending on the level of premium. Please be aware that some insurers offer better cover for certain conditions than others. Most financial planners should have a research tool that assists them in selecting the most appropriate cover.
When calculating how much cover is required, we take into account that the likelihood of returning to work, in most instances, is very high. However, lifestyle changes need to be reflected in the level of cover chosen. In the instance of contracting cancer, the effects on immediate family needs are important, but of even more significance are the effects of the long-term medication and the requirement for extra relaxation. In most instances we advocate for a minimum of one year’s income requirement as cover.
Another intriguing discussion surrounds the structure of the policy itself. In the past, much like disability cover, dread disease cover was offered as a prepayment of life cover. In other words, any payout in terms of the dread disease benefit would reduce the life cover on that policy. The immediate problem was that after a dread disease event, the life insured would in all likelihood be uninsurable. The proceeds of the dread disease benefit would be spent on adjusting lifestyle and paying for ongoing care. The estate, however, could be left with insufficient cashflow on the subsequent death of the life insured.
To cater for the above problem, most insurers now offer clients the choice of a standalone benefit or a supplementary benefit (as a prepayment of life cover). The standalone benefit is also extremely beneficial to singles or those who do not wish to take out life insurance, but see the absolute necessity of a dread-disease-type benefit.
Previously, insurers only offered dread disease benefits until age 65; this has now changed and insurers now offer a choice of term or ‘whole of life’ dread disease benefit. If a whole-of-life benefit is chosen, it means that as long as the life insured exists and the premiums are paid, the cover continues.
Rule of thumb – old is often better
If you are considering replacing the cover that currently exists on your portfolio we advise that you proceed with the utmost caution. The dread disease benefits you currently enjoy should not be tampered with or cancelled, unless you have fully understood the consequences of your actions.
The ‘old style’ dread disease cover always paid out a 100% benefit on the occurrence of an insured event, even if the event was minor. (It was normally sold as a supplementary benefit on policies before 2003.)
The newer dread disease cover often pays out lower amounts for the same level of cover, even though it may be more inclusive.
There has been a temptation by insurance salesmen to replace cover when it is seen as expensive. Our advice has always been to understand the cover you enjoy and be very careful of tampering with your existing cover as you will not be offered it again.
Given the complexity of the cover offered by the insurers, it is important that you discuss your concerns with your financial planner, so that he or she may assist in holistically optimising the cover for you and your family.
On the medical side of dread disease…
The medical fraternity tells us there are two main causes of these illnesses, namely lifestyle and genetic make-up.
Lifestyle factors include
- dietary habits
- the stress of modern-day living
- lack of adequate and regular exercise
- sedentary working environments
- a preference for entertainment rather than for participation
Genetic factors are less specific, but our inherited DNA can increase the chances of contracting critical illness.
For permanent health – trigger events you may want to consider
- Have any members of your family past or present contracted cancer, suffered a stroke or had a heart complaint of any kind?
- Do you have a sedentary lifestyle?
- Would you consider yourself unfit or out of condition?
- Would a dread disease event or incident affect you financially?
- Have you discussed this form of protection with your financial planner?
- Have you reviewed your risk cover in the last twelve months?
Ian Beere CFP® is a partner at Netto Financial Services and was the Financial Planner of the Year in 2007.